AIG Subsidiaries' Ratings Affirmed By Moody's, Outlook Stable

The A2 insurance financial strength (IFS) rating of the UK-based AIG Europe Limited (AIGEL), an indirect wholly owned subsidiary of American International Group, Inc. (NYSE:AIG) , has been affirmed by Moody’s Investors Service, the rating arm of Moody’s Corporation.

The rating agency has additionally assigned provisional IFS ratings of (P) A2 to the newly established indirect AIG subsidiaries namely, UK-based American International Group UK Limited (AIG UK) and Luxembourg-based AIG Europe S.A. (AESA). The outlook remains stable.

Reasons Behind the Ratings

Moody’s ratings for the P & C insurer AIGEL, reflect its strong market position in the UK commercial lines, its broad product portfolio offered in Europe, its investment strategy as well as the support provided by its affiliates. However, these positives are partially offset by the company’s weak operating results in recent years, catastrophe loss, adverse loss development reserve and its relatively high gross underwriting leverage.

AIGEL is working on its operating performance by shifting resources toward more profitable segments and tightening policy limits along with reducing expenses and using more reinsurance to decrease volatility.

AIGEL’s stable outlook is based on the rating agency view that the unit’s underwriting and reserve volatility will be lowered to such an extent that it will improve its combined ratio to less than 100%.

AIG UK is expected to write commercial lines such as property, liability, special risks and financial lines for multinational, national and middle market clients based on AIGEL’s current operations.

Meanwhile, AESA will not only have a majority of its business in commercial lines but will also write a significant proportion of consumer lines like personal accident, extended warranty and private client coverages. The rating giant expects the companies to be sold through global and regional brokers as well as via smaller agents and other such channels.

Moody’s provisional ratings on AIG UK and AESA prove that the agency anticipates both the company’s arms to get explicit and implicit support from affiliates. This backing is likely to include reinsurance ceded to AIG's flagship P&C operations in the United States, AIG Property Casualty U.S., Inc. (AIG PC US, IFS rating A2 stable) and capital available from AIG parent.

The agency hopes to assign definitive IFS ratings to AESA and AIG UK just when AIGEL deicides to transfer its business to the same entities, which is scheduled for Dec 1, 2018.

What can Lead to Ratings Upgrade or Downgrade?

The factors likely leading to a rating upgrade for AIGEL, AIG UK and AESA include increase in underwriting results and profitability, a favorable or benign development of loss reserves, gross underwriting leverage below 3.5x and an upgrade of the AIG PC US rating.

And the aspects, which might cause a rating downgrade for AIGEL, AIG UK and AESA, are continuous soft underwriting results, further adverse loss development reserve and losses possibly rendering a decline in the capital by more than 10% in a year.

Shares of this Zacks Rank #5 (Strong Sell) have lost 17.50%, wider than the industry’s decline of 3.39% in the past year.

Stocks to Consider

A few better-ranked stocks from the same space are Kemper Corporation ( (NYSE:KMPR) , MetLife, Inc. (NYSE:MET) and Loews Corporation (NYSE:L) .

Kemper is a diversified insurance holding company, providing property and casualty, and life and health insurance in the United States. It sports a Zacks Rank #1 (Strong Buy) and managed to pull off a trailing four-quarter positive surprise of 121.61%. You can see the complete list of today’s Zacks #1 Rank stocks here.

MetLife engages in the insurance, annuities, employee benefits and asset management businesses. This Zacks Rank #2 (Buy) company managed to deliver a four-quarter beat of 29.96%.

Loews provides commercial property and casualty insurance in the United States, Canada, the United Kingdom, Continental Europe and Singapore. The stock carries a Zacks Rank of 2. It came up with a whopping four-quarter positive surprise of 557.35%.

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